Idea of the Day: The Government Is Subsidizing Wealth Inequality

June 25, 2014

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Renowned French economist Thomas Piketty’s Capital in the Twenty-First Century thoroughly documents how those at the very top of the income distribution are pulling away from the rest of us. In the United States, wealth inequality has skyrocketed to levels not seen since the 1920s, with the top 0.01 percent of Americans owning more than 10 percent of all national wealth. As sobering as that is, Piketty argues that economic inequality will grow even worse over time, based on his contention that the rate of return on capital will exceed the overall growth rate for the economy. If capital, or wealth, grows faster than the economy, then the owners of that capital and their heirs will amass an even larger share of total national wealth over time. To reverse this trend, Piketty advocates a global wealth tax.

A new CAP issue brief puts aside the question of whether new policies, such as a global wealth tax, should be enacted to reduce economic inequality. Instead, it explores two existing policies that actually subsidize wealth inequality. First, reduced tax rates on capital gains and dividends increase the after-tax rate of return on wealth, which makes it more likely that the rate of return on capital will exceed the overall economic growth rate. Second, capital gains are never subject to the income tax at all if the investor dies, which subsidizes wealth concentration within a family dynasty.